Deviations from Covered Interest Rate Parity

2018/02/21 by WENXIN DU, Wenxin Du, ALEXANDER TEPPER +3 · 689 citations
Economics, Econometrics and Finance · #Arbitrage #Asset (computer security) #Balance sheet #Banking stability, regulation, efficiency #Covered interest arbitrage #Econometrics #Economics #Finance #Financial economics #Geography #Global Financial Crisis and Policies #Interest rate #Interest rate parity #Monetary Policy and Economic Impact #Monetary economics #Quarter (Canadian coin) #Transaction cost

paper · pdf · doi:10.1111/jofi.12620

published in The Journal of Finance 73(3), 915-957 (Wiley)

openalex publication_date 2018/02/21 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/04

Abstract

ABSTRACT We find that deviations from the covered interest rate parity (CIP) condition imply large, persistent, and systematic arbitrage opportunities in one of the largest asset markets in the world. Contrary to the common view, these deviations for major currencies are not explained away by credit risk or transaction costs. They are particularly strong for forward contracts that appear on banks' balance sheets at the end of the quarter, pointing to a causal effect of banking regulation on asset prices. The CIP deviations also appear significantly correlated with other fixed income spreads and with nominal interest rates.

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